How to earn more from your fixed deposit

Bank fixed deposits (FDs) are one of the safest investment avenues. You know exactly how much return you will get when those mature since the interest rate is fixed. But high inflation (as has been the case in the past few years) and the tax deducted on the interest earned are disadvantages. So, it would help to know how you can maximise the returns from your FD, in whatever small way.

If your bank deducts the tax deducted at source (TDS) on a quarterly or semi-annual basis, the interest you earn will be lower against TDS deducted on an annual basis.

This is because in an FD, where the interest is paid on a cumulative basis, every time the interest is added to the principal, the bank is liable to pay interest on the higher amount. So, if the bank deducts tax every quarter, the principal would get depleted by that much. On the other hand, if the bank deducts tax at the end of the financial year, the depositor will be able to earn interest on a higher balance in the deposit.

Banks deduct TDS on FDs at 10 per cent if the interest exceeds Rs 10,000 in a financial year. Since there is no specific rule on when banks should deduct TDS, every bank follows a different procedure. Some deduct it every quarter, some every six months and some annually. Due to this, the effective interest earned on the deposit varies. A circular issued by the Central Board of Direct Taxes, in 2010, said, "Tax shall be deducted at source on accrual of interest at the end of financial year or at periodic intervals in line with practice of the bank or the depositor/payee's requirement or on maturity or encashment of time deposits." This leaves room open for interpretation by banks; hence, the discrepancy.

Ashish Das, from the department of mathematics, Indian Institute of Technology, Bombay, who has published a technical report on this, says uniformity in the way banks cut TDS will help customers choose the bank they want to invest in by comparing interest rates, without worrying about procedural issues affecting the returns.

In his paper, Das says for an FD opened on May 10 for a year, earning 10 per cent rate of interest, if TDS is applied annually on March 31, the annualised yield, after TDS works out to 9.334 per cent. When TDS is applied twice a year, that is, on September 30 and March 31, the yield works out to 9.316 per cent. And when TDS is applied every quarter, the yield works out to 9.307 per cent.

Let us assume that you have invested Rs 1 lakh. If the bank deducts TDS every quarter, the interest earned at the end of the year is Rs 9,307 and the TDS is Rs 1,034. So, the net amount paid at maturity is Rs 1,09,307.

If the bank deducts TDS in September and March, the interest earned is Rs 9,316 and the TDS is Rs 1,035. So, the net amount on maturity is Rs 1,09,316. If the bank deducts TDS only in March, the interest earned is Rs 9,334 and TDS is Rs 1,037. So, the net amount is Rs 1,09,334. So, before you lock into an FD, check what is the procedure followed by the bank for deducting TDS.